Tuesday, November 25, 2008

Using the Short-Term Moving Average of NYSE TICK to Trade Range Days

The previous post showed the distribution of the 10-minute moving average of the NYSE TICK during an uptrend day. Today (above) we saw a very different market.

One of the most important tasks for a daytrader is to identify, as early in the day as possible, the likely day structure. That means trying to differentiate a likely trend day (i.e., one that will close far from its open and near its high or low for the day) from a non-trending day (one that trades within a range). I find the distribution of the NYSE TICK, which continuously measures the number of stocks trading on upticks vs. downticks, to be quite useful in that regard.

On a candidate trend day, I want at least a piece of my capital entering in the direction of the trend early in the day and riding the move throughout. On shorter-term trades, I will trade almost exclusively in the direction of the trend, entering on countertrend moves in TICK.

On a candidate range day, I want to be as nimble as possible. Very often I'm buying pullbacks in TICK and selling bounces. Not infrequently, we'll see "support" and "resistance" levels for the TICK MA on range days, as both buying and selling are relatively contained. That showed up today, with most bounces and dips contained within the range of +400 to -400. Because I'm not expecting a trending move, I'm quicker to take profits on a range day: buying when the TICK MA goes negative and selling when it goes positive often provides a good short-term trade.

When we see relatively constrained values--upside and downside--for the TICK MA during the first hour of trading, and when we see the TICK spending a relatively even amount of time above and below its zero line, that's when we start to think of the day as a candidate range day. False breakout moves are common on those days. Knowing that we were in a range environment, for instance, helped keep me from selling the price lows a little after 1 PM CT.

For reference, the 10-minute moving average of TICK shown above comes from e-Signal data; it is a simple 10-minute moving average of the one-minute high/low/close values for TICK. The chart is in Excel, but the TICK MA can be charted directly within e-Signal. .

About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and The Daily Trading Coach (Wiley, 2009) with an interest in using historical patterns in markets to find a trading edge. I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab).